With billions of dollars allocated to broadband funding in the Infrastructure Investment and Jobs Act, the future of the FCC’s Universal Service Fund (USF) is a hotly debated topic. Now, with multiple lawsuits challenging the very legality of the USF contribution system, as well as new guidance from the Supreme Court on the limits of federal agencies’ power, the future of the Fund hangs in the balance. Join industry experts to discuss the issues raised in Consumers’ Research v. FCC and where the lawsuits stand in the aftermath of West Virginia v. EPA.
- Robert Frieden, Emeritus Professor of Telecommunications and Law, Penn State University
- Harold Furchtgott-Roth, Senior Fellow and Director, Center for the Economics of the Internet, Hudson Institute
- Michael Romano, Sr. VP of Industry Affairs and Business Development, NTCA – The Rural Broadband Association
- Moderator: Arielle Roth, Legislative Counsel, U.S. Senator Roy Blunt
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As always, the Federalist Society takes no position on particular legal or public policy issues; all expressions of opinion are those of the speaker.
Jack Derwin: Hello and welcome to this Federalist Society virtual event. My name is Jack Derwin, and I’m an Associate Director of Practice Groups at The Federalist Society. Today we’re excited to host the panel discussion titled, “Consumers’ Research v. FCC and the Legality of the Universal Service Fund Contribution Regime.” To discuss this topic, we have a fantastic four-person panel. In the interest of time, I’ll keep intros brief now, but please feel free to visit fedsoc.org to view their full bios.
Robert Frieden currently serves as a 2022 Wilson Center Fellow and holds the rank of Emeritus Professor of Telecommunications and Law at Penn State University. Harold Furchtgott-Roth is a Senior Fellow and the Director for the Center for -- excuse me -- and Director of the Center for Economics of the -- one more time -- Director of the Center for the Economics of the Internet at Hudson Institute. Sorry about that, Harold. Michael Romano is Senior Vice President of Industry Affairs and Business Development at NTCA - The Rural Broadband Association. And our moderator for today, Arielle Roth, serves as Legislative Counsel to U.S. Senator Roy Blunt, covering the tech, telecom, antitrust, and consumer protection portfolio.
After discussion between our panelists, we’ll go to audience Q&A, so please enter any questions into the Q&A function at the bottom of your Zoom window. Finally, I’ll note that, as always, all expressions of opinion are those of the guest speakers joining us today. And with that, Arielle, the virtual floor is yours.
Arielle Roth: Thank you, Jack. Today we’re talking about a hot topic in communications law: universal service. The principle of universal service, that many of you are familiar with, is that all Americans ought to have access to basic telecom services regardless of where they live or their level of income. And it’s been at the cornerstone of federal telecom law since its earliest days. Today this policy is advanced through the FCC’s USF, but that wasn’t always the case. For most of the 20th century, during the Ma Bell monopoly, universal service was achieved through implicit cross subsidies. In other words, artificially high rates in urban areas, and for business and long-distance service, helped subsidize local residential telephone service in a high cost for all areas.
That implicit subsidy system was possible by virtue of the telephone monopoly. That system started to erode with the entry of MCI into long-distance market around the ‘70s, and implicit cross subsidies eventually turned explicit with the breakup of the Bell System, culminating in a ’96 telecom act, which established the Universal Service Fund. Today the USF is funded through contributions assessed on telecom service providers’ interstate and international voice revenues, which they typically pass onto consumers through a billing line item. These subsidies are distributed to four-sub programs dedicated to bringing broadband connectivity to different segments of America: high-cost areas, low-income consumers, schools and libraries, and rural healthcare providers. Each quarter, the universal service administrative company, USAC, calculates the amount of support it needs to fund the USF programs and establishes a new contribution factor based on contributing companies’ projected revenues.
When the contributions factor was established two decades ago, it started out in the low single digits. However, it’s risen exponentially over the years. And over the last few quarters, it’s hovered anywhere between 25 to 33 percent. That rise has been attributed to both increased USF spending levels and a narrowing revenues base from which to collect support. USF spending continues to soar while voice revenues continue to decline, hence the relative contribution amount increases. This conundrum has provoked intense policy debates over how to reform USF. And we could easily spend the whole hour on this topic. Indeed, FedSoc held such a teleforum in May, and I highly recommend checking out the recording.
However, today we’re going to talk about a more basic question: the very legality of the USF contribution system in light of several lawsuits in the Fifth and Sixth Circuits brought against the FCC. Specifically, in recent months, plaintiffs in the Fifth and Sixth Circuits filed multiple lawsuits challenging the legality of the USF contribution system. They include consumer group, Consumers’ Research; service provider, Cause Based Commerce; and a group of consumers who pay USF contributions. In the cases, Consumers’ Research v. FCC, Petitioners claim that Section 254 of the 1996 Act constitutes an unconstitutional delegation of Congress’ taxing power and, further, that the FCC sub delegation of authority to USAC, the USF administrators, illegal.
To better understand the significance of and issues raised by these cases, today we are lucky to be joined by a group of esteemed telecom experts, all of whom are involved in different ways in the litigation. So, with that, let me first turn to former FCC Commissioner, Harold Furchtgott-Roth, who is particularly well positioned to discuss the ’96 Act because he was one of its architects. Harold, what was the intention of Section 254, and to what extent does today’s USF contributions regime reflect the original text and the drafters’ intentions?
Harold Furchtgott-Roth: Well, thank you, Arielle, and thank you to The Federalist Society for hosting this event. It’s a great honor to be here with this esteemed panel. Let me say staff are never architects of anything. We’re implementers of our bosses’ views of the world. And, so, I’m very happy to have been able to do that on behalf of Chairman Tom Bliley on the House Congress Committee. I could speak about the intent, and I will speak a little bit about the intent, which the language of 254 heavily came from the Senate side from what is often called the Farm Team.
I worked very much in opposition to a lot of that on behalf of the House. The House lost. The Senate prevailed on a lot of the language, and it was primarily to help the constituents of Mike’s trade association, small rural telephone companies around the country. That was the main purpose of Section 254. There’s no doubt or ambiguity about that. What has happened over the years is that it’s morphed into something very different.
I was going back earlier today, looking at my initial -- my first dissent at the FCC. It was on universal service, on this very issue, about how the Commission got it exactly wrong. And it’s never really recovered. And, so, I think that’s been a real problem. It’s just how the Commission has implemented the language. I think there’s a way the Commission could have and probably still could implement the language that would be consistent with the Constitution, but there’s -- frankly, it’s -- we’ve never moved in that direction.
And over time, it simply has gotten further and further away. I should note I recently wrote a post explaining why intent doesn’t matter. What really matters is what’s in the statute, and I think that’s the real issue here. What’s in Section 254, and has the Commission followed it?
Arielle Roth: Professor Frieden, you’re a prolific expert on USF. Would you like to respond?
Robert Frieden: Well, first of all, thanks very much for the opportunity to participate. My background is a European university, just north of Florence, and I kind of like to put that background. Particularly, in most times in Pennsylvania, where I’m located, it’s 20 below something. Today it’s 20 below 100, and the weather here in central Pennsylvania is very nice, but that’s not the case. In so far as the topic of universal service funding, I want to underscore that I’m not sponsored by anyone. I have a long history of tracking this, and I share the concerns about the sustainability of the program and the expansion of its scope, its cost, its complexity, its vulnerability to litigation, and something that I call compassion fatigue.
When you see a 33 percent surcharge, mandatory contribution factor, that’s going to raise eyebrows. Now, the good news is it’s not 33 percent of 100 or $33, but it is increasing. I wrote a law review article back in 2006. I haven’t seen it for a decade -- well, for a substantial period of time. It was entitled, Killing with Kindness: Fatal Flaws in the 6.5 Billion — make that 8 plus billion — Universal Service Funding Mission and What Should Be Done to Narrow the Digital Divide. The pathway to hell is paved with good intentions. Certainly, it’s a noble calling to try to bridge the digital divide, but the execution is sometimes flawed.
I wrote an amicus brief in the Fifth Circuit, sort of emphasizing that you, particularly at this point in time, don’t want to throw the baby out with the bath water. COVID-19 has created some serious, unanticipated circumstances, questions about national security. And the need to rip and replace China manufactured telecom equipment, costing billions of dollars, is also in the calculus. And I’d say specifically, as to the Section 254, I think the authors did a good job of trying to future-proof legislation. The problem is that in telecom, in particular, it’s very volatile. There are lots of changed circumstances.
Who would have anticipated the importance of the internet? Who would have anticipated that the internet’s an essential, if you will? Who would have anticipated a global pandemic or issues of surveillance via telecom-switching equipment, remotely executed and the like? So there’s a lot of unknown unknowns that, I think, the drafters couldn’t have contemplated. But, looking at the language, looking at an attempt to identify and define telecommunications and information processing and telecommunications separate from telecommunications service, I think they did a pretty admirable job. And now, it’s a question of reforming the processing, not jettisoning it.
Arielle Roth: Let’s just move to the -- discussing the actual lawsuit. So, in Consumers’ Research v. FCC, the Petitioners argue that Section 254 constitutes a standardless delegation of legislative power because they claim the text provides no real limit or intelligible principle when it comes to both the FCC’s power to raise money under the guise of universal service. And there isn’t any kind of ceiling on the amount the FCC can assess. And the FCC itself gets to decide what constitutes universal service.
Harold, so you touched on this in your previous comments. So you signed an amicus brief led by CEI in support of the Petitioners that, on my reading, suggests in some places that the problem isn’t so much with Section 254 itself but the FCC’s interpretation of that. Is that a correct assessment? Is the problem inherent to 254, or is the problem that Petitioners are identifying the FCC’s interpretation of the law?
Harold Furchtgott-Roth: I think they’re arguably one in the same, which is to say either the FCC’s interpretation is that it’s just an unfounded delegation of authority. If the Commission is right that they have the authority to do what they’ve done under Section 254, it’s just an unlimited delegation of authority. Alternatively, if the Commission for the past 25 years had followed a much narrower interpretation, I’m not sure we would be having this lawsuit today. But we don’t have that narrow interpretation. And, so, I think the issue is -- I think they’re one in the same, whether it’s the FCC’s broad -- just unlimited interpretation, or, if the Commission is right, then there really is -- there’s no limit in the statute.
Arielle Roth: Mike Romano, I’d like to turn to you. You’re on the other side of this. NTCA’s an intervener in the case and argues that Section 254 isn’t an unconstitutional delegation consistent with Supreme Court precedent and the modern intelligible principle test. Would you like to respond to the Petitioners and to Harold?
Michael Romano: Sure. And Arielle, thank you for having me participate in this as well. I appreciate the chance to connect with you all in this. Yeah, I’d like the chance to pick up on a few points. The first point, I think — and this is an important one even in talking about other issues that come up in the case about whether this is a fee or a tax, for example. Harold mentioned the beneficiaries of universal service. The ultimate beneficiaries of universal service, and I think this has been highlighted in some of the legislative history, is -- or they are the -- there was a determination that are network effects.
That, in other words, all of the payers into the system benefit from the ability to interconnect with one another, and that’s really a tradition or a hallmark of universal service policy dating back to 1913. Right? This predates even the FCC itself. So I think, when one looks at the beneficiaries, there’s a broader class there, and I think that’s important in this case. I do also appreciate Harold’s point about being able to interpret this consistent with the Constitution. And this goes to, I think, Professor’s Frieden’s point about not throwing the baby out with the bath water. This case sort of tees up the question of, “Should we just throw the whole system out because it’s unconstitutional?”
But, as I think Harold notes, there’s really — and as Professor Frieden’s talked about as well — I think there are ways that one can look at it. And, frankly, we think that what the FCC has done is constitutional. I’ll come to that in a minute. But, if one has a quibble with how the FCC’s done it, it’s not to determine the very delegation of the statute itself to be unconstitutional but rather to talk about the policies and the way they’ve been implemented. And I think the folks who really highlight this well in the case so far are the members of Congress who filed. So you had a number of sitting members of Congress on a bipartisan basis file, explaining why they think a bipartisan piece of legislation to start with is constitutional, why they think it is and it passes the -- and tests, for example, for having intelligible principles.
And I’ll actually -- the quote that struck me from their brief was, “Petitioners’ assertion that the FCC’s administration of and use” -- “the Petitioners’ assertion that the FCC’s and USAC’s administration of the USF system lacks direction from Congress is historically baseless and simply incorrect.” And, again, that’s a bipartisan group of members of the House and Senate alike who’ve made this point. At bottom, we think Section 254 is constitutional under Supreme Court precedent. It complies with the intelligible principle test that’s been articulated by the Supreme Court as it exists today. And intelligible principles abound in Section 254. I know that the Petitioners have called them precatory in some cases and attempted to dismiss them, but they are limiting.
They have been cited by the FCC in limiting its authority to do certain things and rejecting certain arguments. They have been looked at by courts in the past, and in some cases, the FCC has been struck down in terms of universal service policy due to those very principles that are somehow otherwise deemed precatory. So I know that the Petitioners are casting about for a hook about special tests and things like that that it could look to for this kind of action in particular, but, at the end of the day under existing Supreme Court precedent interpreting what is an intelligible principle, Section 254, we think, passes muster.
Arielle Roth: Would anyone care to respond?
Harold Furchtgott-Roth: Yeah, I’d be happy to respond. First of all, let me say, to the extent intent matters — and I’m not sure it does — I think what matters is what Congress actually writes. But to the extent intent matters, I was confirmed in 1997, right after the first set of universal service orders by the FCC. And let me tell you. From both sides of the aisle, I was told, “This universal service program the FCC is putting in place does not work.” And I got — it was unambiguous to me that the Commission — that Congress at the time, on both sides of the aisle, was not happy with where it was going.
And the Commission went off in different directions. It -- this is not a situation where you have the Commission implementing the statute from the outset and having uniform praise from Capitol Hill. I would say pretty much the opposite. And I worked with members on both sides of the aisle, and I never got criticized once for dissenting from the Commission’s universal service rate changes and explaining in detail why I just didn’t think the Commission had the authority. So I’m not saying that -- members of Congress have their views, and they’re -- they are the ones who are elected. They’re the ones who are representing people.
But I -- I’m just not sure that the case, at least when I was working up on -- at the FCC -- that there was widespread support for exactly what the FCC was doing at the time. Maybe there is now. I just -- I can only speak from my own history.
Michael Romano: Yeah, so, Arielle, if I can just jump in back of that point. I apologize if I’m stepping over Professor Frieden, if he was going to jump in. But I think what Harold’s highlighting, though, is that there is a policy disagreement — right? — not a legal disagreement necessarily. It’s the way in which the Commission went about it is the cause of the dissent or concern, not the constitutionality or the very ability of the Commission to carry out certain things. And, again, that’s certainly a point that can be debated. But this case challenges the very delegation of authority to the Commission to assess contributions.
And, so, I think the question is, “Does it hold that authority to implement Congress’s delegation, the contribution mechanism?” I think the answer is, yes, based upon the guidance and the boundaries that Congress has set. And I think that’s the point that has been made in the Congressional brief. I don’t think they’re necessarily asserting, “This is what we or others sitting in our seats intended in 1996.” They’re pointing to the statute as it stands now and whether it is bounded and provides intelligible principle.
Harold Furchtgott-Roth: I would say, though, that, from the very outset, there was a lot of concern about the Commission setting up a tax structure. This is not a new issue that simply developed in the past couple years. There was concern from the outset about whether the Commission had the authority to set up the fund in the way it did and to finance it in the way it did. Different members had different views. I’m saying everyone had that view, but it was not -- these concerns about the constitutionality of the tax are non-new issues.
Robert Frieden: Let me just chime in, following up on Michael’s comments. I’ve had the benefit or the curse, if you will, of tracking this for a long, long time, particularly before enactment of the ’96 Act. And emphasize, the ’96 Act codifies what was obscure, makes more transparent what was, initially, privately implemented. And AT&T killed two birds with one stone. It sustained its monopoly, but it also fostered -- created a fund, a subsidiary mechanism for building out into rural areas. If you look back before ’96 and before enactment of the ’96 Act, there was a lot of stuff that, quite frankly, wouldn’t pass the smell test.
The National Association of Regulatory Utility Commissioners — bless their hearts — had the opportunity to basically determine that a minute of long-distance traffic was 330 percent, not 33 percent but 3.3 times the cost causation of a local minute. And there was something called rate integration, which I love. I looked up the distance between Guam and Boston this morning, and it’s 7,000 miles. Rate integration was this wonderful boondog, which basically took the cost of continental United States service, long distance, when we had a time -- at a time when we had minutes of use and metered service and whatnot, added on to that, the cost to serve Alaska, the cost to serve Hawaii — hence it was certainly nonpartisan, bipartisan — the cost to serve Puerto Rico, the US Virgins Islands, Guam, and American Samoa. So you could call from American Samoa and Guam to Boston, it would be substantially lower. And we didn’t have an ad hoc group of long-distance callers of the Chamber of Commerce disputing that.
And I got to sort of go to the issue also of taxation. My definition of taxation, my understanding of taxation is that someone who earns income, someone who is subject to the taxing authority of the United States pays funds into the US Treasury, and then the US Treasury disburses those funds. This is a mandatory, but it says voluntary, contribution factor. I think there’s a difference between allocating -- telling carriers, “A certain percentage of your revenues will be attributable to this service for which there’s a mandated -- explicit mandate in the Act now that codifies that which was not clear, nontransparent.” And the carriers themselves passed through that expense to a select group of rate bearers. I think the real problem here is -- I agree that it’s not necessarily legal, but it’s more a question of sustainability of a program when you have a declining set of underwriters who, quite frankly, are not happy to see that there are spillover and positive effects flowing to a lot of ventures that could make contributions to the well-being and bridging the digital divide have certainly exploit 00:24:02 and have the opportunity to generate vast revenues, significant revenues and profits in the internet ecosystem, thanks to attempts to make access to the internet, broadband, and voice telephony more affordable and more accessible.
I write about compassion fatigue. I’ve got a paper I’m working on just now. The 33 percent is a daunting figure, but there are ways to reform that to make it more workable, and I’ll defer that to a later discussion. But, in terms of my sort of bottom line, this is a question where you certainly don’t want to look at the COVID people who are driven by COVID to drive to a McDonald’s parking lot. You certainly don’t want to be on the side of suggesting, “Well, maybe we should have hundreds more FCC government employees administrating this instead of USAC.” And I don’t think you want to be on the side of saying, “Well, let’s make it harder for people, particularly rural areas, to access the cloud and social networks.” Now, I should admit, I’ve lived in rural Pennsylvania for 30 plus years, and my circumstances are different. But I could drive 5, 10 miles from where I live just now, and there’s no cell phone services, only satellite, slow-speed data.
Arielle Roth: I’d like to just pick up on an issue that has been kind of touched upon, that really zeroes in on the issue of whether 254 contains a limiting principle on the FCC’s authority, and that’s the question of whether the USF contribution mechanism is a fear of tax. Professor Frieden, could you explain why this classification is relevant from a constitutional perspective?
Robert Frieden: Okay. I will try, and I know you’re interested about the impact of West Virginia.
Arielle Roth: Yes.
Robert Frieden: And I’ll add something called the Chevron doctrine. I want to go back to something that the ’96 Act did, and that is the codification of policy. And they named names. They identified beneficiaries, and when you expand the set of beneficiaries, the E-Rate — libraries, schools, healthcare facilities, tribal nations, what have you — you’re going to push the complexity calculus time and time again. The USAC provides on their website a — perhaps a self-serving — calculation of who the beneficiaries are, and I’m just going to cite to that website -- I haven’t fact checked it -- 8.1 million individual beneficiaries; 120,147 schools and libraries; and 9,050 rural healthcare facilities.
If you that -- if you have that kind of set of beneficiaries, you’re going to have complexity. You’re going to have scamming. You’re going to have abuse. You’re going to have a lot of good money chasing after bad money. You’re going to have throwing money at the problem. You’re going to have poor calibration.
You’re going to have maybe an overemphasis on the supply side as opposed to enhancing digital literacy and how to use computers and smartphones. You’re going to see recurring subsidiaries to carriers and not necessarily vouchers to individuals, direct funding individuals. You’re going to have all bunch of complexities and areas of disagreement as to what’s the best practice, what’s the best-case scenario. But going to your question. So the first principle’s, “Is this a tax?” I just -- I don’t see how you characterize it as a tax when it is not funds flowing to the US Treasury and from the US Treasury.
Arielle Roth: Harold, do you want to respond to that? Do -- is the USF a tax?
Harold Furchtgott-Roth: I think the way it’s structured now it’s unambiguously a tax. It’s -- the people who pay in — and the statute’s very clear. It’s only carriers of interstate telecommunications services contribute, and they contribute without direct benefit. And I recognize Mike’s point about the network effects. But I think that’s a little bit indirect. The Commission itself is funded by a fee structure, and the fee structure is on licenses and on permits.
So, in order to get a license fee, license or a permit, you have to pay the FCC. And that’s how the FCC funds itself. That is not the structure at all for how USF is funded. It could have been funded that way. And for many years, I helped organize a group that was focused on a numbers-based system where, in order to get numbers, you would make a contribution to USF. They would -- in that way, you would have this sort of quid pro quo. You donate something; you get something in return. And then, it’s a fee. It’s not a tax.
But the way USF is funded right now, you get it -- you’re a carrier of telecommunication service between Washington, DC and New York, and you get a bill for $100 or whatever it is. And you get -- you really aren’t getting a lot directly in return. It’s very indirect. So I think it’s a tax and not a fee.
Arielle Roth: Mike, would you like to respond to that?
Michael Romano: Sure. Yeah. And I saw also the comment from a good friend about the fact that mechanically the funds do flow through Treasury. Although, I know that, at the time, it was specifically set up by those who were at the FCC that while the funds are maintained in Treasury in a special account, they’re not part of the sort of general tax revenue of the United States. And they’re separate -- they’re put into a separate account for purposes of -- previously, they were held in commercial banks until such a time it was found that they should be -- it was better to store them in the Treasury. And I remember a lot of mechanics around that. But, nonetheless, I think the ultimate point is the courts that have looked at this have said previously that it’s not a tax. They’ve looked at it and said, “It’s a fee.” The DC Circuit has said this. The Fifth Circuit itself — the very place where this case is, one of the cases at least, is being litigated — 20-something years ago looked at this question and said, “This is a fee and not a tax.”
Look. At the end of the day, whether -- the mechanics of where it flows are one thing, but it’s not for the purpose of raising revenue. The primary purpose is to ensure universal service policy as articulated by Congress. It’s assessed on certain regulated entities. It’s for the purpose of defraying the costs of providing a service that’s overseen by the FCC. And I’m just going to quote the Fifth Circuit here; they looked at this previously. “It’s payment in support of a service, managing and regulating the public telecommunications network that confers special benefits on the payees.”
So, in that case, it looks an awful lot like a user fee — rather a fee, rather than a tax. And it’s not the case that any fee that happens to have, as Harold said, indirect effects that also help other beneficiaries to convert a fee into a tax. That’s just by operation of the nature of these network effects. This -- a number of states that have looked at this more recently have found the same thing. There’d been a challenge in Louisiana, which just sits in the Fifth Circuit. Obviously, that’s not binding. It’s looking at a state universal service fund.
But there, that court said that it’s allocating the cost for the administration of a regulatory program. And ultimately, I think, too, one thing to just keep in mind is the Supreme Court’s previously — and it knows it’s been teed up in the case where it’s been argued that, because this is a tax, it’s somehow subject to a special level of nondelegation doctrine than otherwise would be the case. Again, don’t think it’s a tax in the first instance, but, even if it is, the Supreme Court said in Skinner — I’m going to quote this as well — “We find no support for the contention that the text of the Constitution or the practices of Congress require the application of a different and stricter nondelegation doctrine in cases where Congress delegates discretionary authority to the executive under its taxing power.” So don’t think it’s a fee in the first instance -- or I don’t think it’s tax the first instance, think it’s a fee. But to the extent that someone were to determine somehow that, despite the prior precedent, it is a tax and not a fee, that doesn’t necessarily then trigger or tripwire into a new, nondelegation doctrine-level of scrutiny.
Robert Frieden: Just to chime in with a fine point. If you look at your phone bill — I encourage everyone participating, look at their phone bill — you’re going to see a proliferation of billing line items. It’s starting to look like a concert ticket or an Airbnb or cable television. There’s a real proliferation. In fact, just recently, I think the Commonwealth of Virginia is going to impose or has already imposed a couple of pennies surcharge for the suicide 9-8-8 toll-free number. I think if you looked at many of these line items, you’d see tax. Okay?
It’s going to a municipal or state program. It’s going to a political entity. You’d see something — including the universal service fee — you’d see something that -- called the subscriber line charge, and that’s seven plus dollars. Where is that going? It’s going to the carriers to defray the cost of building a network to originate -- terminate long-distance traffic. I think it’s very difficult for your general consumer when they are beset with these line items one after another after another.
It’s like the convenience fee to print your tickets to go to a concert. Right? And it all gets subsumed into taxation. It’s a tax. It’s a tax. I want to just go back, lastly, to the notion of the carriers themselves not benefiting. First of all, they -- it doesn’t come out of their pocket. It’s a pass-through to their subscribers, and to the extent they are participants in and recipients of universal service funding, they certainly participate in the largess. VoIP, Voice over the Internet, service providers have to contribute, or their customers have to contribute, and they are not beneficiaries in the Universal Service Fund.
Arielle Roth: I want to be mindful of the time because I have other questions to get to here, but, Harold, did you want to respond?
Harold Furchtgott-Roth: Why don’t we go on to the next question?
Arielle Roth: Yeah. Okay. So let’s just switch gears a little and talk about USAC, the permanent administrator of the USF. So there have been plenty of concerns raised over the years when it comes to USAC’s discretion, accountability, transparency, efficiency, and responsiveness to the point that Congress explicitly told the FCC in the Broadband DATA Act that USAC couldn’t administer the FCC’s broadband maps. Here, though, Petitioners argue that the FCC’s delegation of authority to USAC to determine quarterly contribution factors is straight up illegal. So, Professor Frieden, in your amicus brief, you defend USAC or at least the idea of an independent universal service funding organization. And you state that having such an organization promotes greater transparency, accountability, and efficiency in the collection of disbursement of funds. Do you think USAC’s permanent administration of the Fund is legally proper?
Robert Frieden: I believe so because, if you look historically at how are you going to try to bridge the digital divide, how are you trying to achieve the Maitland ITU Commission of 1985, proposing that everyone should have access or be within walking distance of a telephone. If you look at the participation of the National Association of Regulatory Utility Commissioners and a Federal-State Joint Board on universal service funding, you see that there’s been collaboration between states and the federal government. If there were preemption, I’m sure the states would scream that this is -- that this involves federalism, that this is something that combines intrastate local service and interstate service. And I go back to sort of a practical matter. Do you really, really want to have hundreds more FCC employees handling the collection of funds and the distribution of funds? And I understand the point about the escrow account at the Treasury.
I look at this as something where you have an explicit part of the Communications Act that recognizes the delegation and the consultation with advisory committees and with Federal-State Joint Boards. And I think it was a practical matter to say that if you’re going to expand the set of beneficiaries, the E-Rate beneficiaries — all those libraries, all those schools, those healthcare facilities and the like — better to offshore it or send it, privatize it, take it out of the government, and have somebody expert and develop a learning curve on doing that. The alternative would be, “Well, maybe don’t have a private funding of the system.” You have the general taxpayer funding of the system in which case the Justice Department could be involved in auditing.
One other point about the allocation of responsibility or the achievement of the subsidiary obligation -- or allocation of a subsidiary obligation on the basis of telephone numbers. I’ve looked at that, and it’s clean, and I appreciate the Commissioner Furchtgott-Roth’s comments about that. But it also can be counter progressive in the sense that not all phone numbers are the same. There’re heavily used phone numbers, and there’re not so heavily used phone numbers. There’re second phone numbers into a residence, and there’re 2nd or 22nd or 222nd numbers into a business or whatnot, so it could be regressive.
Arielle Roth: Harold, do you want to respond? Is a -- on the USAC question.
Harold Furchtgott-Roth: Yes. Right. It’s just an oddity about all of this. You won’t find USAC in the statute. You won’t find the word, Universal Service Fund, in the statute. You won’t find the word, Universal -- or the phrase, Universal Service Fee, in the statute. All of this was created by the FCC without explicit authority from Congress. The FCC sent up a Delaware corporation. There is no authority in the Communications Act for the FCC to set up a Delaware corporation. The FCC assigned this Delaware corporation enormous discretion. You won’t find that in the statute.
This whole structure of USAC is so lawless that it is -- it -- I find it deeply troubling. It has a budget -- it has an administrative budget of 250 million dollars in 2021, which is roughly half the size of the FCC. Now, admittedly, the FCC isn’t handing out 8 billion dollars a year, and I’m not saying that that’s something that the FCC could swallow easily. But it’s the FCC that has the statutory authority. It’s the FCC that has the statutory responsibility. And by golly, it should be the FCC that’s doing all of these things, not some third-party.
And the way all of this gets funded is USAC -- and, look, I’m not -- they’re wonderful people at USAC. I’m not criticizing the people there in any way at all. And I’m not criticizing what they’re doing. All I’m saying is what they’re doing should be done by a federal agency under the Communications Act, not something that’s just been completely created out of thin air. And the way they get funded is quarterly, beginning since 2003, they send over their cost estimates, which are fine. And then, the FCC has this complete sleight of hand, which isn’t USAC’s problem — it’s the FCC’s problem — where the FCC says, “Unless the FCC votes against this, it goes into effect in 14 days.”
This default structure, where a third-party, nongovernmental entity says, “Here’s our bill. You have to pay it, and we’re going to set the rate for this government program.” And there’s no FCC vote on it? The FCC should be taking a vote on this every quarter, saying, “Yes, we are the responsible party. We’re going to vote on this.” And I think it actually -- it all should be done inside the FCC, whether the FCC’s capable or not, and it should be up to Congress to change that, if Congress wants to have some third-party. You will not find Universal Service Administrative Corporation in the Communications Act.
Arielle Roth: Mike, do you want to respond?
Michael Romano: Yeah. USAC doesn’t jump without the FCC saying how high. At bottom, USAC is under the guidance and direction of the FCC. They’ve been retained by the FCC for the purposes of serving as the administrator of the Universal Service Fund. And, Arielle, even your question, you said, “They determine the quarterly contribution factor.” And Harold sort of went to that with his point about they send over the bill. They’re using FCC data, FCC filings that are collected from the regulated entities to figure out what it is.
They’re not determining; they’re calculating. They are performing the ministerial task of tabulating what the FCC has received from the regulated entities, telling the FCC what that calculation adds back up to, and, yes, they give it to the FCC. And the FCC takes it back, and then, within 14 days, unless others weigh in, it then sets it at that level. But that is a ministerial administrative task that is being performed, pursuant to a defined set of functions that the FCC has told USAC to follow. USAC doesn’t make policy. USAC has to consult the FCC wherever there’s uncertainty.
If someone has a challenge with what USAC has done, that is a -- that determination is appealed with the FCC, and then, the FCC will rule on that, either through the appropriate bureau or through the Commission itself. For the purposes of this specific deal -- and I don’t disagree with Harold that there are things that USAC could be doing better or differently. Our members have their own issues with USAC and how they do certain things in the administration of the program on behalf of the FCC. But, at the end of the day, USAC only does what the FCC tells it to do. And for the purposes of the appeal, it only calculates the quarterly contribution factor. It does not determine it. It does not set its own policy in deciding how to do that. It has zero discretion, other than to take the FCC’s data and do that calculation for the FCC.
Again, you can have a discussion, much like we were saying earlier, about is there a better way to do it? Probably so. But there’s a -- that’s a different discussion than whether it’s constitutional or whether they’ve given a -- they’ve violated the nondelegation doctrine by going externally to an entity like USAC for performance of some of these contracted functions.
Robert Frieden: Just to add a footnote about USAC and explicit recognition of their administrative function. Now, I know COVID-19 creates exigencies that are probably not likely to have been anticipated, but what do you do in this emergency? There’s explicit recognition by Congress in allocating from the Treasury, from tax revenues, USAC to be the administrator for some of the ad hoc COVID-19-oriented, short-term emergency relief. So there’s at least a recognition explicitly that USAC has the capability in at least disbursing funds quickly. And we can dispute as to whether that’s throwing good money after bad or throwing money at the problem and whatnot. That’s for another conference, but USAC has been explicitly recognized by Congress as the go-to entity to disburse the funds and manage the process.
Arielle Roth: Harold, were you going to say something?
Harold Furchtgott-Roth: I was just going to say I would be a lot more comfortable if the Commission took a vote every quarter and said, “Yes.”
Robert Frieden: Fair.
Harold Furchtgott-Roth: “We’re happy with these numbers.” But they don’t. It’s -- we’re on this automatic pilot system that was set up in 2003 back when universal service contribution rates were in the single digits. And the FCC just is missing in action.
Arielle Roth: Picking up on that -- what you just said, the system being set up two decades ago. We’ve a question from the audience that asks about timing. “If there” -- the question asks, “If there were concerns over the constitutionality of the FCC’s implementation of the USF’s system shortly after the ’96 Act, why was this legal challenge not filed at that time? Why wait 25 years to do it?” And that also picks up on the argument that the FCC or the government raises in response to litigation, that the challenge is, they claim, is untimely. And, so, I just wanted to turn and see, what do the panelists think of these procedural arguments?
The government raises an argument that the case is beyond the Hobbs Act 60-day time limit for filing pre-enforcement facial challenges, and they claim -- well, while Petitioners purport to challenge the FCC’s approval of a particular contribution factor, they’re really challenging the contribution system itself. What do you think of these arguments? And, I guess, similarly, is there another reason that these challenges are being filed now? Is there a more underlying reason that has to do with the timing? There’s been a lot of anticipation over the Supreme Court’s interest in curtailing the so-called administrative state. And that’s also -- that exists at the same time as -- kind of an existential questions regarding the USF.
There’s been proposals in recent years to massively -- well, to expand the programs through broadening the contributions base. And then, there’s also certain uncertainties, regarding the USF and the aftermath of the infrastructure legislation. So I just thought -- I thought I’d open it up to questions about timing and what you think about the -- about these issues.
Michael Romano: Well, I’ll go ahead and start. We actually-- I know a number of folks raised Hobbs Act arguments. The FCC itself raised them, obviously, in its brief. And I think there’s merit to those. The Petitioners’ challenge isn’t to -- and I know they dress it up as, “Well, every quarter, it’s a new rule” -- essentially, they’re challenging -- but they’re not challenging that the -- the amount of the calculation. They’re challenging the fundamental, underlying constitutionality of the very application of a contribution requirement in this way. So treating every quarter as if it’s a new application seems like a distinction without a difference.
They had 25 years to raise the -- to take notice of the contribution factor and raise their challenges, and it took them roughly 96 quarters to get around to doing so. So I think trying to leverage the establishment of ministerial factor into a challenge of the rule is a bridge too far. And actually, this, in turn, feeds into a number of the reliance interests that, I think, have been raised in some of the briefs. I think a number of the groups raised the point that, since then, a number of entities and beneficiaries have come to rely upon these programs for so many critical things. And you see the FCC itself. Right? In recent years, we’ve seen FCCs on both sides of the aisle of all perspectives on what the nondelegation doctrine might be otherwise, I presume, leveraging the universal service program to do more, to introduce telehealth and connected care programs and the like, all of which actually put more burden on the contribution mechanism but rightly so, from policy judgment perspective without concern, necessarily, exactly how that is funded and thinking there could be improvements in it, I’m sure.
A number of the folks who’ve done that have expressed support specifically for potentially changing the way in which contributions are assessed. Going back to Harold’s point, there may be a very good case for why numbers are a better system. It -- we’ve certainly considered that ourselves in the past. But, at the end of the day, a number of parties have come to rely upon this mechanism — a number of beneficiaries — as a result of this having been in place for over two decades, and the challenge would appear to be untimely for that reason. At the end of the day, again, I think there’s just a lot of -- there’s a lot of reliance upon these. And I think that there’s a need to make sure that those who are using these programs now and who’ve bought into these programs — as Professor Frieden said, in the COVID era, for example — can continue to do so without disruption, given the belated nature of the challenge.
Arielle Roth: Anyone want to -- yeah, go ahead.
Harold Furchtgott-Roth: Let me just try to tease out some issues here. First of all, I’m very sympathetic on the reliance issues. I don’t think whatever the courts would do would lead to some just immediate secession of the programs, at least I would hope that would not be the case. But I think if we look at -- look, I’m a very simple fellow. I’m not a lawyer. I have no views about timeliness. But I do have views about the importance of an agency following precisely what the statute says because I was there when the ’96 Act passed.
I saw how difficult it is, and I want to defend every single word in that statute and not go outside it and not invent things. And what I think has happened at the FCC over the past 25 years is the FCC, I don’t even think looks at the statute anymore, to be quite honest. And we haven’t even discussed, and this case doesn’t raise, what I think is the biggest missed miscarriage in 254, which is the complete absence of the 214 requirement to receive funds. That’s what the statute says, “You cannot receive anything under this section unless you were 214.” Well, the Commission hasn’t done that in decades. And this -- what has happened is this program has evolved in so many ways that have -- that are untethered to the statute, and it’s not healthy. I really don’t think it’s healthy for the recipients of the program to be reliant on a program that has such feeble, at best, really feeble, at best, relationship to any statutory authority.
At the end of the day, if we are a country that is governed by the rule of law, then we have to actually follow what the law says, not to sort of say, “Well, we’ve gotten so far away from it for decades. Let’s just continue being far away because we’re so used to it.” And I’m -- I think we need to figure out a way: how do we get back to the statute? And, yes, there are reliance issues. And I am very sympathetic to what those reliance issues are. But I think there has to be a way to get the reliance issues addressed, but let’s get the agency back to following the law.
Arielle Roth: Harold, I just -- an interesting question popped up, and I just wanted to get to it. I know we don’t have a lot of time left. And this actually goes back to the USAC issue and the issue you raised about following the statute. So Mike claims that USAC’s role is ministerial and is legally proper. So the question asks, “Harold, could -- if USAC’s role were or were purely ministerial, could the FCC not contract out that function? And if they -- if -- or that they could contract out that function, but they’d have to follow federal contracting law.”
Harold Furchtgott-Roth: Yes. They’d have to follow federal contracting law, and I -- that’s not how this has evolved over time.
Arielle Roth: Yeah.
Harold Furchtgott-Roth: But I’m -- I think there’s a lot that goes on there that’s not purely ministerial. Some of it clearly is and probably could be contracted out. But I’m not convinced all of it is.
Arielle Roth: So it wouldn’t just be solved through, in your opinion, through bidding out USAC’s contract?
Harold Furchtgott-Roth: You could. That would -- I think that, at the very least, would address the administrative cost, but I don’t know enough about the details of that to have a good answer, and I leave that to Professor Frieden and Mike Romano to address.
Michael Romano: Arielle, if I could, though -- actually, I do want to just add in -- I think, when it comes to the issue that is at the core of this case, which is the calculation of the contribution factor each quarter, that really is probably among the most ministerial functions that USAC does perform. They take FCC data. They calculate it. They send it back to the FCC. USAC does a lot of other things that -- I guess, I don’t even know all functions they perform in a variety of programs. But, in this particular case, in this particular instance, I’m having a really hard time seeing what’s not ministerial about calculating a contribution factor.
And I’ve not heard any facts that lay out that it’s something more ambitious or extra jurisdictional than that calculation. The one thing I also just want to mention as a clarification. Harold had brought up 214, and I always love this because this always comes up all the time in the high-cost context. People say that we should do away with eligible telecommunications carrier designation. It still does exist in the high-cost program. It’s something we’ve actually thought is — precisely the reason you’ve outlined — is something that should continue because 254 requires that 214 apply.
And we hear from a lot of folks that it should be eliminated. You can’t just write it out of the statute. I think it’s an important measure of accountability that Congress sought to insert there. And for that reason, we continue to be big believers in it.
Arielle Roth: I just want to -- oh, go ahead. Yeah. I just -- we -- I had one more question. I just want to be mindful of time because we only have a few minutes left. So we’ve talked a lot about the nondelegation doctrine, and that’s mostly what the briefs in the case focus on. I was just wondering -- we -- recently, the Supreme Court decided West Virginia v. EPA. And many SCOTUS watchers had predicted that the Supreme Court would reinvigorate the nondelegation doctrine there.
But instead, the Court resolved that case through applying the major questions doctrine. So I also want -- and also, I know that the amicus brief that Harold signed onto raises a major question/challenge, arguing if Congress wanted the FCC to create such a massive program, which the brief construes as a tax, it would have spoken clearly. Just wondering, does -- do the panelists think that West Virginia v. EPA bears on Consumers’ Research v. FCC? And also, just finally, as just a last question, any predictions on the case?
Robert Frieden: I’ll chime in, and I’ll be brief. I take Commissioner Furchtgott-Roth’s comments about mission creep. It’s serious. But circumstances change, and the citizenry are expanding their appetite, their expectations of what you can get from a fiber optical, wireless pipe. So do you accommodate that without legislation, without revision of the legislation? I would support, absolutely, going back to Congress, but they don’t regularly enact revisions, amendments to the law. Thirty-four takes us ninety-six; ninety-six takes us now many years hence, and certainly, the circumstances have changed.
In so far as West Virginia’s concerned, I think you really do have to dot your i’s and cross your t’s, but going back to complimenting the drafters, I think they tried to future-proof. They crafted very sophisticated definitions of telecommunications, telecommunications information service, and they also anticipated that there could be a time where you have to expand the set of contributors, contributors who provide telecommunications as part of, maybe a content distribution network, maybe an enhanced service, maybe ISPs — internet service providers — broadband, internet access providers. You could dispute that and say, “Well, this is telecommunications that is not a mass market, holding out to the public.” And there’re going to be all sorts of opportunities for lawyers to litigate that, but going back to the Chevron doctrine, there is ambiguity. And the question is whether the Commission has been reasonable. I think there are instances where they have and instances where they have not been.
Arielle Roth: Any last predictions or comments?
Harold Furchtgott-Roth: Obviously, I think West Virginia applies. I have no idea how the courts will, in the Fifth and Sixth Circuit, will play out.
Michael Romano: And I guess I would just say it hasn’t really been teed up in the Fifth Circuit case because it only got introduced in the brief that Harold put in, so the Districts have not really raised it. That being said, I do think it’s different. You had a case in which the EPA was alleged to have adopted a far-reaching rule based upon a pretty ambiguous, fairly used statutory provision. Whereas, here, as Professor Frieden said, you’ve got something with 20 years of jurisprudence and regulatory regime around it. It’s been interpreted and applied multiple times over, so I do think it presents a different case here.
Arielle Roth: Well, thank you to all the participants and the panelists today. This has been a fascinating discussion, and thanks to all for tuning in.
Harold Furchtgott-Roth: Thanks for having us.
Robert Frieden: Yeah.
Michael Romano: Thank you.
Jack Derwin: Thanks so much, Arielle, and I’ll reiterate your thanks to the rest of the panel --
Arielle Roth: Thanks, Federalist Society.
Jack Derwin: -- as well. Oh, of course. Happy to have you all. And thank you to our audience for tuning in to today’s virtual event. You can check out our website, fedsoc.org, or follow us on any of the major social media platforms, @fedsoc, to stay up to date. With that, we’re adjourned.